Germany’s liquidating funds poised for steeper losses

A recent analysis by Berlin-based rating agency Scope of the German open-ended funds currently in liquidation highlights the extent of the losses being faced by investors in those funds, with the prospect of even steeper downward revaluation of the assets ahead.

Scope concluded that the 11 German open-ended property funds currently in liquidation have been selling assets at an average discount of nearly 13% to book value. This discount is noticeably increasing, the longer it takes to sell the assets on the funds’ books. From the 11 funds, a total of 126 assets have since been sold with the loss in valuations deteriorating from initially 6.9% in the first year, to 18.5% in the second year and more than 22% for those in the third year.

The remaining 381 assets held in the funds have lost on average 4.5% since the onset of liquidations, with Scope expecting a further at least 5% average loss when they are sold. Scope points to the varying quality of the portfolios, however, and warns that further discounts of up to 15% on weaker assets should be expected.

The Scope study analyses all 381 remaining assets in the funds, and gives each an individual risk score. The least risky portfolio profiles are held by KanAm Grundinvest-Fonds, CS Euroreal, TMW Immobilien Weltfonds, and SEB ImmoInvest. At the opposite end of the risk spectrum are AXA Immoselect and the three DEGI funds – DEGI Global Business, DEGI International, and DEGI German Business.

Differentiating between assets, Scope says that geographically the highest losses (and valuation write-downs, where not yet sold) were posted in Japan (-49.4%), the Netherlands (-14.9%), Spain (-14.5%) and the USA (-10.8%). Not surprisingly, properties with the highest occupancy rates (particularly above 97%) saw the least drop in value, while vacancy rates of 42% or more led to double-digit valuation losses.  In terms of building size, the average loss across most building sizes averaged between 8.1% and 9.3% - with the exception of the very biggest buildings, valued at €200m to €500m, which contained losses to about 1%.

Meanwhile, the turbulence of the last few years experienced by the German open-ended funds hasn’t prevented the emergence of new funds targeted at the saving public. SEB and now KanAm have announced new vehicles which comply with Germany’s new Capital Investment Act which came into force on July 22nd, with new minimum investment periods and redemption notices for new investors.

The Munich-based KanAm has started selling its new Leading Cities Invest fund, which will start by buying four office properties in Paris, Brussels, Berlin and London. It is currently raising equity from investors and targets a return of 3% annually. Touting its proprietary scoring systems C-Score and Property Selection for identifying top-quality investments, KanAm stresses on its website that, “…For the first time, the fund offers “shock resistance” – i.e. protection against fund closures caused by unforeseeable unit redemptions – thanks to the 24-month minimum holding period and the 12-month notice period, which apply equally to all investors.”

At the same time, KanAm has just announced its fifth payout to investors in its liquidating KanAm Grundinvest Fonds, which has been in liquidation since February 2012 (and had the lowest risk profile of the funds analysed by Scope, above). Since end-2011 the fund has been shrunk from €6.4bn to €4.1bn, with payouts of €666m to investors, including the latest tranche of €150m.